Legal documents, and, more precisely, contracts, can still end up being misinterpreted long after they are signed, sealed, and delivered. No matter how strong they might appear on the surface, misunderstandings often rear their ugly head at the slightest appearance of an unclear provision.
To avoid this, it’s imperative to be aware of how contracts are structured, as well as possess a clear understanding of how they are usually interpreted.
We’re going to help you brush up on the general structure, as well as the main principles of interpretation of a legal document.
Format of a contract
The first thing to keep in mind is that an effective contract needs to cover all the necessary details to erase any ambiguity. Even details that might seem like common sense should also be added.
Contracts usually follow a similar structure. For instance, if you’re wondering what is NDA and if the same rules apply to this type of contract, the answer is ‘yes’, for the most part. The only differences will be found in the body of the document.
Certain elements aren’t necessary for a legal document to be considered enforceable. However, sections that go beyond the usual framework of simply describing a transaction are useful if you want to remove any room for misinterpretation.
A contract might follow a structure similar to this:
- Contract parties: This section contains the full names and addresses of agreeing parties.
- Recitals: Here is where the reader is given the background of the agreement. Recitals can provide additional clarification on the interpretation of different terms of the contract.
- Definitions: The section contains the terms used in the contract. The meaning of each term is defined, giving the reader the idea of how the term is to be interpreted.
- Conditions precedent: A stipulation that provides that the agreement will come into force once a certain event occurs.
- Provisional clauses: The main body of a contract where the rights and obligations of each party are laid out.
- Boilerplate clauses: Standard clauses at the end of the agreement that address details such as how the disputes will be handled.
- Schedules: Section that gives additional details of the contract.
When is interpretation needed?
Knowing the structure and the provisions of a document is just one aspect of understanding the full picture. Naturally, the other aspect is the knowledge about how the interpretation of a document is determined.
Interpretation will happen if there is a disagreement on the terms of the contract. Sometimes, a contract might contain vague terms that lead to different interpretations, and if the parties are unable to agree on the meaning of the term, a court might need to review the contract.
Judges and lawyers will apply broad principles to the process of interpretation, so having a good understanding of the basics of contractual interpretation will help you avoid this situation altogether the next time you draft a contract.
Some of the principles that courts use are:
1. Interpreting the document as a whole
The goal here is to understand the intent of the parties, so one of the main principles is that the document will be interpreted as a whole. This means that the clauses are supposed to be read together, making it easy to gain a better understanding of the contract’s purpose.
Unless otherwise stated, the definition of one part will be applied to the rest of the document.
2. Ordinary meaning
Interpretation of the contract is first done by relying on the ordinary meanings of the words unless it’s defined that the term in question is used differently in the contract.
This principle is easily followed if the language is clear and specific.
However, if the terms of the contract are vague, the court can disregard it in favor of using acts and circumstances (including different documents) outside the framework of the contract itself to interpret the problematic terms.
3. Commercial common sense
If the language is ambiguous and there is no conflict with the common meanings of the used words, the court might adopt the interpretation that reflects commercial common sense.
This is where the recitals section can come in handy as it can give the court additional information on the background of the agreement. This makes it easy to establish the meaning that’s a better reflection of commercial common sense.
4. Additional principles
When ambiguity is at play, there are also countless other ways for judges to interpret a contract, such as:
- Usage of trade: Judges can take into account industry-specific practices when they interpret the contract.
- Interpreting in a reasonable matter: If there is ambiguity, the court can reject an interpretation that leads to absurd results.
- The course of dealing: The court can take into account how parties have acted to each other in the past.
The clearest interpretation is the best interpretation
Always make sure that everyone on board can see eye-to-eye. Each of the parties needs to have a good understanding of the contracts, especially when it comes to the definitions of important terms.
This entire ordeal of interpretation can be completely avoided by simply taking a few precautions during the drafting process and ensuring that all the terms and conditions are clearly stated in the contract.
You can use recitals, definitions, as well as schedules as extra ways to protect yourself, in case your contract ever goes up to a judge for review.
In a way, these sections might just be the piece of content that helps a judge make a favorable interpretation, so we advise you to never skimp out on them simply because you can.